Convert to a Roth IRA or Stick with your Traditional IRA…

This year conversions from Traditional to Roth IRA’s were way up due to the elimination of income limitations that were previously applied to the conversions. But is converting to a Roth IRA a good idea when it comes to your income taxes? In some cases it is a smart move to convert now and in others the tax implications are far too great.

Conversion is attractive mainly because withdrawals from Roth IRAs, unlike those from traditional IRAs, are tax-free.

Moreover, Roth IRAs also have no withdrawal requirements; traditional IRAs require investors to begin making withdrawals at age 70½.

Basically contributions to a Traditional IRA can create a current tax savings while Roth IRA contributions can save you money in taxes later. So the decision lies in the ability to save on your income taxes and this can be a tricky formula to figure out. You should always consult a Financial Advisor before making these decisions; if you do not currently have one or are interested in finding a new advisor follow this link to find out about all the Financial Services offered at R&G Brenner.

“The biggest question advisers have to ask is whether paying taxes is feasible for the investor right now,” says Michele Grant, a Roth IRA expert at Wells Fargo & Co.

Investors “don’t want to use funds from the IRA to pay the taxes,” she says, because that eats into retirement savings. “So do they have the funds elsewhere? And if so, what does that do to them liquidity-wise immediately?”

Ms. Grant says that given the economic downturn, a lot of investors simply don’t have the money to pay the taxes up front. But that needn’t nix the idea of a conversion altogether, she says. For some investors, converting to a Roth IRA gradually, over a number of years, might spread out the tax impact enough to make it affordable.

The tax rates are anticipated to go up over time and this is the reason why some people would prefer to pay the tax now at what is believed to be a lower rate. For many this is not the case because adding to taxable income increases the taxpayer’s current tax bracket.

… taxes for the wealthy are going up, but very few people have as much income in retirement as they do in the height of their working years,” says Thomas Wiggins, a financial adviser with Rehmann Financial who is based in Troy, Mich. “Even if taxes do go up, investors will likely be in a lower income bracket once they start taking distributions from their retirement fund.”

So there is no simple answer as to which would be better for you. The fact is that taxes will never go away so planning is important to make sure that the decisions made will have the most beneficial outcome when it comes to tax savings.